The Effects of Low Unemployment Rate


Pandemic has created huge unemployment in 2020 and 2021. It affected not only developing countries but also developed countries. In 2020, between March and August, it was reported that over a million people applied for unemployment insurance each week in the US.

And the UK isn’t exceptional. But from 2014 to mid-2019, the UK has continuously reduced the unemployment rate. And In 2020, it went up to 4.34% due to the pandemic. The rates have reduced below the pre-pandemic level at 3.7% in the first three months of 2022.

A low unemployment rate shows that many people are earning and it also shows an improvement in one’s standard of life. It reduces the government’s spending on financial aid for people below the poverty line, as now the number of people will reduce as they get jobs.

Everything seems good, right? But, It’s not as good as you think. A low unemployment rate would result in affecting an individual as well as a nation.

Though from April the unemployment rate has risen to 3.8%, let’s understand what are the effects of the low unemployment rate and why it was not a good sign.

Increase in Wage due to Low Unemployment Rate

But as there was a low unemployment rate, employees are using this opportunity to raise their wages or resign their job for a better workplace.

Rise in Resignation
Rise in Resignation, Source: Bureau of Labour Statistics

In 2022, reports say that in January alone 4.3 million people quit their job. Employers are forced to raise their wages to attract skilled workers. Resignations are increasing every year, So employers are also now offering various benefits to retain them. Wages already increased by 7.0% on the year.

How Low Unemployment Rate Affects Small Firms

According to the Uk government’s report 2021, there were around 5.6 million small businesses, which was 99.2% of the total business population. Impacting this 99.2% could impact the entire UK Economy.

  • Can’t Afford to Retain Employees: Most small companies wouldn’t be in a position to raise wages to what employees expect.
  • Affects Productivity: As an alternative, They will hire new and unskilled workers. Most of the time and resources would be spent on training them. It affects the overall productivity of a firm.
  • Reducing Production: Due to a shortage of workers, Production will be reduced.
  • Loss of Potential Customers: As businesses are forced to raise the price of their services and products, They tend to lose a lot of potential customers.

How Low Unemployment Rate affects Individuals

Reduces Employment Opportunities: As companies will struggle to retain existing employees, they would freeze all their hiring processes and focus more on other areas.

It almost works like a cycle that when unemployment is low, workers raise the wage, then companies struggle to pay and stop hiring processes which increases the unemployment rate back.

Considering all these, Bank of England chief Andrew Bailey said that workers should think and reflect before raising their wages. He says he declined his offer for an increment. And advised others to consider the risks before asking for a pay rise in circumstances like this.

Increase in Prices:

As companies’ production is increasing, they have no other option than rising the price of their products. From raw materials to finished products, everything will be increased in price.

It slows down the entire economic growth of a nation. Price Increases in essentials like food and transportation make our life more complex. It would create hunger and food scarcity.

When the price of commodities increases Purchasing power of people will reduce. Many people will be pushed to poverty.

We considered a low unemployment rate is good because we thought it will improve our standard of living. However, now we understood it’s not completely true. A low unemployment rate may worsen conditions for both companies and individuals.

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